This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Tax-Free Bonds Offer Tempting Yields

Portfolio manager Duane McAllister shined during the financial crisis by limiting his exposure to general obligation bonds, which are backed by the tax revenue of states and other issuers. As income and sales taxes dropped during the recession, GOs in Illinois and other states slumped.

McAllister has emphasized revenue bonds, which are backed by income from a single source, such as a sewer system or power producer. By sticking with reliable revenue sources, he outdid most peers in the turmoil of 2008 and 2009.

These days, BMO is beginning to shift back to GOs because income and property taxes are increasing as the economy recovers. "Half the states now have overall revenue that are above where they were before the recession," McAllister says.

Investors seeking a relatively high yield should consider USAA Tax Exempt Intermediate-Term (USATX) , which yields 3.7%. During the past five years, the fund returned 5.6% annually, outdoing 83% of peers. Portfolio manager Regina Shafer boosts yields by holding a sizable stake in bonds rated BBB, the lowest investment-grade rating. "The lower-quality bonds have performed well as the economy has recovered," says Shafer.

She argues that the BBB bonds remain attractive because they yield considerably more than top-quality issues. A 15-year BBB bond yields 3.5%, compared to a yield of 2.1% for bonds that carry the top rating of AAA.

Another strong performer is Lord Abbett Intermediate Tax Free (LISAX), which returned 6.0% annually during the past five years and outdid 91% of peers. Portfolio manager Dan Solender is keen on hospital issuers that have strong positions in their markets. "A lot of hospitals should thrive as the health sector evolves," he says.

Solender has bought some lower-quality issues. A favorite bond is a 15-year issue from Southwest Airlines (LUV - Get Report), which is rated BBB- and yields 3.9%.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
LUV $43.25 -1.70%
AAPL $94.54 0.96%
FB $117.68 -0.75%
GOOG $692.94 -0.75%
TSLA $233.96 -3.20%


Chart of I:DJI
DOW 17,699.37 -191.79 -1.07%
S&P 500 2,060.40 -21.03 -1.01%
NASDAQ 4,763.4950 -54.0990 -1.12%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs